From: AlanBaggett@volcanomail.com   
      
   Underground economy players impervious to CRA's 'nudge' experiment :CRA SOTW   
      
   Novel approach to prodding citizens to pay taxes flops in latest Canada   
   Revenue Agency experiment   
      
   By Dean Beeby, CBC News Posted: Apr 26, 2017 5:00 AM ET Last Updated: Apr 26,   
   2017 6:58 AM ET    
      
   An experiment using "nudge" letters to coax Canadians in the underground   
   economy to pay their taxes has flopped, highlighting the limits of this new   
   approach to changing citizen behaviour.   
      
   "Nudge" economics is the practice of encouraging people to make desired   
   choices through suggestion rather than by threat of penalty or sanction.   
      
   The approach has been enthusiastically adopted by the British government,   
   which in 2010 created a special unit to try "nudge" techniques on the   
   population, including for tax collection. Australia, the United States,   
   France, Switzerland and others have    
   followed suit.   
      
   The Canada Revenue Agency has been a recent convert, experimenting with   
   low-cost "nudge" techniques in various tax-collection initiatives since 2014.   
      
   But the agency hit a wall last year when an underground-economy experiment   
   involving 6,877 taxpayers failed, apparently demonstrating that hard core tax   
   evaders pay scant attention to soft-sell letters from the taxman.   
      
   Last year's experiment focused on taxpayers in the underground economy, which   
   traditionally includes home renovators, food service employees and others in   
   sectors where cash transactions are common. The report released to CBC News   
   blacks out exactly    
   which underground economy players were targeted, and the CRA declined to   
   identify them when asked directly by CBC.   
      
   "In conclusion, we failed to find evidence supporting any of the three   
   behavioural outcomes that the nudge campaign expected to produce," says an   
   internal August 2016 report, obtained by CBC News under the Access to   
   Information Act.   
      
   Each of the three desired outcomes that failed to transpire involved a   
   taxpayer acknowledging income that previously may have been deliberately   
   hidden from the Canada Revenue Agency.   
      
   The agency carried out one of its first "nudge" experiments in September 2014   
   on 8,000 ordinary taxpayers who had been assessed up to $950 in taxes owing   
   for the 2013 tax year but had not yet paid.   
      
   "Nudge" letters – half of them with friendly encouragement, the other half   
   with less-friendly language — were sent to these taxpayers, and compared   
   with those who got a standard stern collection letter.   
      
   The agency found that the "nudge" letters collected 12 per cent more taxes   
   owed than the standard letter.   
      
   Behaviour compared   
   Letters were sent in March 2016. One group received a version with a positive   
   message: "You can benefit by reporting all your income." Another group got a   
   version with a negative tone: "Avoid costly consequences by reporting all your   
   income."   
      
   The behaviour of the letter recipients was compared with that of people in a   
   control group, who did not receive a letter. Each version of the "nudge"   
   letter had a special CRA website address, to help the agency determine whether   
   one or the other letter †  
   “ friendly versus unfriendly – generated more web traffic.   
      
   The websites did see some traffic spikes, but the letters had no effect on   
   "nudging" these taxpayers to report more of their income. Unexpectedly, the   
   control group – the underground-economy targets who received no "nudge"   
   letters – actually reported    
   more new income than the "nudged" groups.   
      
   "Nudge" economics has been criticized by some experts as a flash in the plan   
   â€“ as taxpayers become accustomed to friendly reminders, they ignore them   
   more. In some jurisdictions, such as France and Switzerland, even initial   
   "nudge" letters had no    
   effect.   
      
   The approach has also been deemed inappropriate for some classes of taxpayers,   
   including those with hardened attitudes against paying their taxes.   
      
   Called inappropriate   
   A July 2014 workshop run by the CRA itself found nudging "unsuitable" for   
   people with "strong negative attitudes toward the CRA or taxation in general;   
   low risk aversion; lack of concern with consequences of getting caught;   
   perception that cheating on    
   taxes is 'not a big deal'."   
      
   A university economist specializing in taxation who made a presentation at the   
   2014 workshop says she warned CRA that "nudge" techniques are inappropriate   
   for underground-economy players.   
      
   "Overall, I am unsurprised by the findings," Lindsay Tedds, an associate   
   professor in the School of Public Administration at the University of   
   Victoria, said of the 2016 experiment.   
      
   "CRA should be unsurprised by the findings. Nudge is not the tool to be using   
   for intentional tax non-compliance."   
      
   Rather, the technique "will work on people who made a mistake, don't   
   understand the rule, lack information, follow the herd, misunderstand the   
   risks, and so on," Tedds has written.   
      
   A spokesman for the CRA, David Walters, acknowledges the experiment did not   
   produce the expected outcome.   
      
   University of Victoria Prof. Lindsay Tedds advised the CRA in 2014 that   
   players in the underground economy were not suitable targets for "nudge"   
   letters. (University of Victoria)   
      
   "Although the results of this particular experiment suggest that nudge   
   messaging may not be the most effective approach to influence the reporting   
   behaviour of underground economy (UE) participants in the particular industry   
   sector chosen for the 2016    
   experiment, there may be other UE participants for who such techniques could   
   prove effective," he said.   
      
   "Even if a nudge does not produce the intended result, the CRA still learns   
   valuable information about the behaviour of the targeted information."   
      
   The cost of the 2016 experiment, like many "nudge" initiatives, was low at   
   $17,400.   
      
   Last year, Statistics Canada released a report estimating the size of Canada's   
   underground economy in 2013 at $45.6 billion.   
      
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